United States District Court, D. Massachusetts
AER ADVISORS INC., WILLIAM J. DEUTSCH, and PETER E. DEUTSCH, Plaintiffs,
FIDELITY BROKERAGE SERVICES LLC, Defendant.
MEMORANDUM AND ORDER
B. SARIS CHIEF UNITED STATES DISTRICT JUDGE.
AER Advisors Inc. (“AER”), William J. Deutsch,
and Peter E. Deutsch bring this action against Fidelity
Brokerage Services LLC (“Fidelity”), alleging
that its unauthorized lending of the Deutsches' shares in
China Medical Technologies Inc. (“China
Medical”), caused a market disruption in June 2012. To
cover up its role in the market disruption, Fidelity
allegedly implicated Plaintiffs in a false Suspicious
Activity Report (“SAR”), filed with the
government. As a result of the SAR, Plaintiffs claim they
were subject to investigations by various state and federal
November 8, 2017, the United States District Court for the
Southern District of Florida ordered that the case be
transferred to this Court. See Docket No. 40. One
month later, Plaintiffs filed their Second Amended Complaint
(“SAC”) (Docket No. 64), asserting 13 causes of
action, all of which are primarily based on the SAR. The
claims are for negligent reporting (Counts I and II),
tortious interference with existing business relationships
(Count III), tortious interference with prospective business
relationships (Count IV), breach of contract and the covenant
of good faith and fair dealing (Counts V and VI), promissory
estoppel (Count VII), breach of fiduciary duty (Count VIII),
unjust enrichment (Count IX), negligence or gross negligence
(Count X), deceptive and unfair trade practices (Counts XI
and XII), and prima facie tort (Count XIII).
moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), arguing
first that it enjoys absolute immunity from liability for any
SAR filed. Second, Fidelity maintains that any claims
predicated on its alleged unlawful lending of the
Deutsches' shares must be dismissed under the doctrine of
claim preclusion. Finally, Fidelity argues that AER's
claim for tortious interference with existing business
relationships is barred by the statute of limitations.
hearing, the Court ALLOWS
Fidelity's motion to dismiss (Docket No. 66).
following factual background comes from Plaintiffs' SAC.
Plaintiffs' factual allegations must be accepted as true
at this stage of the litigation. See Foley v. Wells Fargo
Bank, N.A., 772 F.3d 63, 71 (1st Cir. 2014).
registered investment advisor, served clients nationwide with
“discretionary investment management services.”
SAC ¶ 17. AER joined Fidelity's Wealth Central
platform in 2009 and exclusively relied on that platform to
provide its investment services to clients. SAC ¶¶
18-19. Fidelity promised to assist AER with business
development and growth. SAC ¶ 21. In reliance on that
promise, AER actively solicited business from clients
nationwide. SAC ¶ 21. In 2011, AER introduced the
“China Gold” investment strategy and decided to
make the strategy the focus of its business model. SAC
¶¶ 22, 111. The China Gold strategy was based on
the expectation that the anomalously low prices at which some
Chinese securities were trading would “trigger a
management buy-out or another privately driven exit
transaction (e.g., a strategic acquisition).” SAC
¶ 22. Fidelity supported China Gold and incorporated the
strategy into its own investing. SAC ¶ 23.
Deutsch is the Chairman of Deutsch Family Wine & Spirits,
and Peter Deutsch serves as the company's Chief Executive
Officer. SAC ¶¶ 8-9. The Deutsches were clients of
Fidelity's Family Office Services (“FFOS”),
and eventually participated in AER's China Gold strategy.
SAC ¶¶ 25-26. When Peter Deutsch decided to join
FFOS in November 2011, he accepted Fidelity's service
proposal, which offered him “seamless and
flawless” strategy execution, institutional-quality
brokerage services, and a “client first, ”
“conflict-free environment.” SAC ¶¶
27-28. Peter Deutsch relied on Fidelity's promises about
the services it would provide. SAC ¶ 28.
The China Medical Investment and Market
Peter Deutsch joined FFOS, the Deutsches decided to
accumulate a large number of shares of China Medical, gain
control of the company, and sell it to a buyer or private
equity firm. See SAC ¶¶ 29-30. Peter
Deutsch began acquiring China Medical shares through his FFOS
account in December 2011. SAC ¶ 33. By February 28,
2012, the Deutsches owned nearly 4.4 million shares of the
company. SAC ¶ 34. They had purchased around 8.6 million
additional shares by June 30, 2012. SAC ¶ 34.
emailed AER on March 5, 2012, with an offer for the Deutsches
to join its “fully paid lending program” for
their China Medical shares. SAC ¶ 35. In the email,
Fidelity represented that its “securities lending desk
in Capital Markets [was] paying a 5% rate . . . for these
hard to borrow shares.” SAC ¶ 35. The email also
acknowledged that there was “a 100% requirement to hold
this position” and that a “service agreement
[would] need to be signed by the end client to enter into
this program.” SAC ¶ 35. If the Deutsches had
accepted Fidelity's offer, they would have been in a good
position to accomplish a short squeeze. See SAC
¶ 36. However, AER replied to Fidelity's offer with
a straightforward rejection: “Client is not interested
in lending stock.” SAC ¶ 37. After receiving
AER's email, Fidelity never advised the Deutsches that
they should move their shares and trade in a cash account, as
required by Fidelity's internal policy. SAC ¶ 39.
the fact that Fidelity had not received consent to lend,
between May and early June of 2012, the company lent nearly
1.8 million of the Deutsches' China Medical shares to
short sellers or their brokers. SAC ¶ 41. Fidelity made
money from these loans, but the Deutsches were not notified
of the lending, were not paid any compensation for the loans,
and did not receive any collateral. SAC ¶ 42. When AER
asked Fidelity whether it had lent the Deutsches' stock
without their authorization, Fidelity responded that it could
not disclose that information. See SAC ¶ 49.
Peter Deutsch was also told by Amanda Topping at FFOS that
the portion of China Medical stocks that Fidelity could lend
out from his account was “very small.” SAC ¶
wine turned to vinegar in June 2012. On June 11, 2012, after
“a routine monthly transfer of [China Medical] shares
between the Deutsches' margin accounts, ”
Fidelity's lending triggered a recall obligation. SAC
¶¶ 45-46. The company then issued a recall for
about 1.5 million shares on June 13, 2012, eventually
recalling approximately 1.8 million shares over the next few
days. SAC ¶ 46. The Senior Vice President and head of
the Securities Lending Desk of Fidelity Capital Markets,
Ugyen Sass, anticipated a short squeeze due to the
company's loans and failed recalls on June 15, 2012. SAC
¶ 46. Then, on June 18, 2012, Fidelity issued its final
batch of recalls. SAC ¶ 46. Because the recalls failed,
Fidelity bought roughly 1.2 million shares of China Medical
on the open market between June 19 and June 27, 2012. SAC
¶ 46. The price of the stock increased from $4.00 per
share on June 13, 2012, to $11.80 per share on June 29, 2012.
SAC ¶ 46.
29, 2012, the Securities and Exchange Commission
(“SEC”) halted the trading of China Medical.
See SAC ¶ 46.
The SAR and the ...